Two weeks ago I featured the benefits of the USDA Rural Housing Loan, which is a very good loan with 100% financing. However, this loan limits its’ availability to those buying houses in areas deemed eligible by USDA and those who are under certain income limitations set forth by USDA.
Last week I discussed the FHA loan which used to be a good option for those seeking a low down payment. However, recent changes have increased the cost of the Mortgage Insurance (MI) that FHA charges and for the most popular FHA loan, the 30 year fixed rate loan with 3.5% down, the MI is now charged to the home owner for the full 30 years of the loan; it does not drop off after a period of time like in the past. The FHA loan has now become a very expensive loan because of this MI change.
Good news comes in another good low down payment loan program, the Conventional Loan with 3% Down Payment. This loan does not have any up-front MI whereas FHA charges 1.75% that is added to the loan amount financed. Even better is the monthly MI, which is priced on a comparable or better rate than FHA.
- The FHA 30 year fixed rate loan with 3.5% down, charges MI for the full 30 years of the loan.
- The Conventional Loan with MI allows the MI to be removed at any time the loan to value reaches 80%, and it automatically drops off when loan to value reaches 78%. Best of all there is no minimum time period that it must be charged.
The example below compares a 30 year fixed rate FHA loan with 3.5% down vs. the Conventional loan with 3% down.
Despite the fact that it has a lower interest rate, the FHA loan has a higher APR and costs $19,251.20 more due to the MI being more expensive and charged for 30 years. Once the Conventional loan reaches 80% loan to value the home owner can request the MI be removed. It automatically drops off at 78% loan to value. (All numbers are estimates. This example does not include property taxes and home owners insurance)
You are welcome to email specific questions to me at mtarleton@englending.com, call me at 850-866-2963, and also visit my website at www.bankofengland.us.
Mike Tarleton
Sr. Mortgage Loan Officer
Bank of England. 5410 E. Hwy 30-A, Suite 212. Santa Rosa Beach, FL 32459
850-866-2963 (Cell)
706-888-0980 (Cell / Text)
NMLS: #264821
PCBDaily 
Thanks for the article. It is information and the example you have provide some good fact. One thing I want to clarify; is your assumption of getting conventional loan with 3% down payment correct? or you want to revise it to 20%. I think thats the major reason people go for FHA loans than conventional?
For argument sake, I have 20% but I take FHA loan with only 3.5% down payment. I think we also need to consider the liquidity I’ll have and the interest I can earn on that 16.5% of the cash…
Thoughts?
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Anuj,
Thanks for your comment and your question is a valid one because in the past, most loan down payment loans were done via FHA, VA and USDA. (I can remember when FHA’s monthly MI was around 0.55% vs. the 1.35% they now charge.) For this reason, no lenders needed to make conventional loans with MI because private MI was a higher cost than FHA, so the conventional loan was assumed only when buyers put 20% down.
However in today’s lending environment, FHA’s MI cost is so high that the private MI companies can offer better pricing to insure the lender’s exposure over 80% LTV, up to 97% LTV. That is a correct figure, we do offer a 97% Conventional Loan with MI.
Since you have the 20% to put down, you would want to consider what else you could be doing with that money were if it were not tied up in your home? Remember back when mortgage rates were 8%-9% and CD rates were 5%-6%. In the next 5 years would you want to have more cash on hand to invest in a rebounding economy at higher rates?
I don’t have a crystal ball, and rates could drop a little lower, but not much. But when the economy heats up, rates will be moving much higher than they are now. That means increasing property values and getting the MI removed from this conventional loan much earlier when 80% LTV is achieved.
Extra funds tied up in a 20% down payment will be locked into to paying you a return of whatever your loan rate is, likely between 4.50% and 5.00% using today’s rates.
You may also consider a conventional loan with a 5% down payment because that lowers the MI cost substantially and offers a better loan rate than the 3% down product.
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